An Analysis of NFC's Annual
Page 26
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Report by a financial correspondent THE ANNUAL Report of the National Freight Corporation was issued last week. It is a well-presented document that justifies time spent considering the various issues that it raises.
Profit ii reported of £2.225 million before extraordinary income from property transactions. This is against a loss in 1976 of £9.609 million. The improvement of £11.8 million comes mainly from the parcels companies' trading profits, £7.1 million, and a marked reduction in redundancy charges and pension liabilities, £3.6 million. The remainder of the Corporation shows a small net improvement of £1.1 million with additional leasing interest eating into the improvements in the trading profits of BRS and Special Traffics.
The complexity of property disposal, extraordinary items and interest on increased borrowing from the Secretary of State make further comparison of 1977 with the previous year of little value apart from recording that there is a £5.8 million improvement overall.
If the Transport Bill becomes law, the Corporation's finances will be reconstructed and some £50 million removed from its capital debt, leaving a liability of £100 million. This will reduce the interest liability from £12.3 million to some £8.5 million.
This generous gesture would indeed be welcomed by any private sector management from its shareholders, but while the Corporation's report recognises "the significant help" it expresses concern "about the inadequacy" because it will "place NFC at a disadvantage in a competitive market".
The basis of the argument is that the interest bearing debt is not covered by assets capable of producing a return. The report fails to explain this against a balance sheet that includes property of £80 million, and against its investment in vehicles and equipment over the past four years of £50 million, and without explanation questions the validity of the asset values in the balance sheet.
The extent to which NFC is or will be at a disadvantage in its competitive market can to some extent be judged by its profit margins before charging any interest. Profit before extraordinary income represents less than 0.6 per cent of turnover in NFC.
The nearest comparable organisation in the private sector is Transport Development Group, where the latest report shows an equivalent figure of over 10 per cent.
This difference of business performance could be attributed to already lower pricing, or it could lie in less efficient utilisation of resources, or in the provision of operating costs that are not borne by the private sector companies. Adjustment to capital debt liability is not going to affect profit margins, an area where the Corporation shows poorly against its private sector competitors.
It could be misleading to observe that "to earn sufficient to cover interest and other charges and allow the NFC to break even, the Corporation will need to produce a return of 15 per cent on capital, which is above average for the industry".
The statement is strictly true, but must be read against a background of reducing the capital by a third — if any more capital were written off the required return would be even higher!
Reverting to TDG, the return on net assets employed in 19.3 per cent in 1977; if their shareholders were to write a third off the value, the return would be approaching 30 pc.
The Corporation justified its claim of unreasonable requirement against 111/2 per cent as the average return on capital employed reported in a • Dataquest Survey 1977. This survey covered one of the most depressed periods for the industry. If the capital producing that average were reduced by a third, it would become about 17 per cent.
The Corporation thus seem to suggest that it is reasonable to expect them to achieve in the future a return of less than the average for the industry at the most depressed point of a decade, to avoid being at a "disadvantage in a competitive market".
The financial and statistical summary in the Annual Report brings sharply into focus the failure to sort out the NCL financing problem as the provision of the 1968 Transport Act drew to a close in 1973.
The Corporation has struggled since the end of 1973 with an impossible financing problem. It is a sad reflection that this problem will only be sorted out, reasonably or otherwise in mid-I978, nearly five years after it started.
It must be pointed out that the problem was in no way of NFC's creation. It is the kind of problem that should not be imposed on a management and, of course, in the private sector could not be imposed.
This company, as the report shows, had an unbelievable success story while it had the confidence behind it of the financial provisions of the 1968 Act. It built up a strength and resilience during those years that enabled it to live through and recover from the labour problems reported in the 1975 Report and the severe drop in traffic volumes in 1974/5.
In Fashionflow it has developed two specialist textile distribution businesses, in Homeward and Chinaflow businesses specialising in mail order and pottery distribution respectively.
The Transport Bill sorts out the financial problems by reducing the capital debt of this company by £34 million. This should give it new heart and every reason to be confident of its future.
The report is very short of information to enable a commentary of any depth to be made on the subsidiary companies. For NFC as a whole the costs to be met after trading profit represent 6.3 per cent of gross receipts. This includes 4.4 per cent of interest, a figure which does not compare too unfavourably with some 3% per cent of TDG turnover required for dividend, loan interest and bank interest (ignoring the substantial contribution of tax to the Exchequer).
Allocation of interest to subsidiaries in the published figures precludes judgment of their earnings after they have met NFC costs. The reported trading profits and margins can only broadly be judged in the knowledge that there are costs including inte representing over 6 per ce gross receipts still to be vided after recording trading profit.
In 1977 BRS trading p was 6.2 per cent on g receipts following a 6.1 cent in 1976. These fig must be judged against a Group policy that "contii to be to invest in services ducing higher rates of ret' with continuing efforts improve the profitabilit general haulage", and agi' the level of costs to be 1> after the trading profit poi • Specialised Traffic Gr represents the -trend specialisation" that the poration "are convinced 15 right course". They identi serious problem in Cartr port, and if those results eliminated from their fig the trading profit in 1977 per cent of gross receipts, same as the previous year again to be judged against level of costs still to be videcl after the trading p: point.
It is admirable to mainta rate of trading profit to g receipts in the face of inflat but if that level is unsatis tory, little progress is lx made in solving the bush problems which will mani themselves in cash flow.
These two groups are ba getting by on a profit and account basis and on tF figures cannot be contribu to the cash requirement: the remainder of the s sidiaries.
BRS and Special Traf produce 50 per cent of Gross Receipts of NFC (has excluded Freightliners, wl are soon to be the resp sibility of BRB). The remair 50 per cent produces a trac profit of 0.6 per cent and eludes National Carriers 26 cent, on which comment already been made, and Re line 14 per cent who are str gling out of their problems. The only company mak any sort of show is Temi which, while it makes 22 cent trading profit "including share of the res: of associated companies"! less than 1 per cent of the gr receipts of the Corporation The report itself and the alysis of it have not revea any real jewel in the crown which NFC can develop a gc business. It is speculation t this may be the real bati ground between managem and those acting for 1 "shareholders" on matters writing off investment.